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newbie trying to learn advandced concepts
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newbie trying to learn advandced concepts

  #1 (permalink)
Trading Apprentice
Senoia, GA
 
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newbie trying to learn advandced concepts

Good Afternoon,

Ok, I'm invested in MSFT and trying to look at the options as a signal for direction of movement. First is this a dumb concept or am i hitting on something? I see Apr 15(36) $43 call at 0.33 and puts at 2.27. Does that mean that the options indicate a more likely hood of the underlying being above $43 because of the put price being 95% greater that the call. Am i looking at this correctly?

Thank you

John D.

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  #2 (permalink)
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  #3 (permalink)
Membership Temporarily Revoked
Amarillo Texas/USA
 
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Look at what's called the put call ratio



jdowning View Post
Good Afternoon,

Ok, I'm invested in MSFT and trying to look at the options as a signal for direction of movement. First is this a dumb concept or am i hitting on something? I see Apr 15(36) $43 call at 0.33 and puts at 2.27. Does that mean that the options indicate a more likely hood of the underlying being above $43 because of the put price being 95% greater that the call. Am i looking at this correctly?

Thank you

John D.

The price has nothing to do with it. Look at what's called the put/call ratio
Instead, Go to the current month strike price which is closest to the stock price.
On Yahoo, you can pull up msft, hit options on the left. Toward the right it will say list and straddle, hit straddle so that you can see the puts and calls side by side.

Go to the strike price that is closest to the current stock price and simply compare the number of puts to calls. Higher ratio of puts means more people expect the stock to go down and the reverse the higher number of calls mean more people expect the stock to go up.

msft is now 41.02. The closest strike price is 41. At 41 under open interest there are 222 calls being held. and there are 601 puts being held. This indicates the current sentiment from the put/call ratio is that the expectation is that the stock will go up.

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  #4 (permalink)
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Nashville TN/USA
 
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I agree with the above as far as the prices being what they are. But if I want to look at open interest or volume as an indicator of sentiment I might consider that no one really knows what those numbers might mean. They could be offsetting some risk on some other position or sentiment. They might just be reducing capital requirements on an over all short position or ? you really have no way of knowing.

However open interest and volume can be an indicator that you might be more likely to get filled at the price you want.

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  #5 (permalink)
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Thanks!

Thank you ACstudio and e4williams,

My theory was to see if that would be a general consensus of movement. I also get a social media consensus of a stock when i'm interested in it. This requires taking a grain of salt because I realize people have "motives" and just different strategies. But it does give me some insight to overall sentiment.

I'm going to start paying some attention to the put-call ratio and see how price action corresponds, if at all. I'm just trying to improve my trading.


Thanks again,

John D.

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  #6 (permalink)
Trading Apprentice
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Always a good idea to learn as much as possible. Keep in mind that there are algorithms that can track millions of occurrences for whatever ratio you want to look at and if there were any advantage one way or another for any historical data set it would have been taken advantage of long ago.

There are all sorts of confirmation bias problems one can have. For this scenario "sample size" would be a big problem. It would be very difficult for an individual to witness enough occurrences to arrive at a true understanding of the data.

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  #7 (permalink)
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Some good articles on this topic from Dr. Steenbarger:

TraderFeed: Using Put-Call Ratios to Gauge Intraday Stock Market Sentiment
TraderFeed: Measuring Stock Market Sentiment: The Equity Put-Call Ratio
TraderFeed: Relative Equity Put/Call Ratio: What We Can Learn From Stock Market Sentiment

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  #8 (permalink)
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Generally speaking, any strange pricing you see in options will be accounted for by upcoming earnings, ex-div, splits, or something of that sort. Options are generally very efficiently priced, and the computers that are the market makers in options have sophisticated formulas best understood by PhDs, that quickly arb away most any mispricing.

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  #9 (permalink)
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Thanks, Tradelog for your post. Those articles from Dr. Steenbarger were really insightful and helpful. I found the TraderFeed: Using Put-Call Ratios to Gauge Intraday Stock Market Sentiment article to be especially insightful and well stated. Didn't have enough posts to repost the URL.. see above for Tradelog's post

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  #10 (permalink)
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jdowning View Post
Good Afternoon,

Ok, I'm invested in MSFT and trying to look at the options as a signal for direction of movement. First is this a dumb concept or am i hitting on something? I see Apr 15(36) $43 call at 0.33 and puts at 2.27. Does that mean that the options indicate a more likely hood of the underlying being above $43 because of the put price being 95% greater that the call. Am i looking at this correctly?

Thank you

John D.


I see you use Thinkorswim.

What I been doing for a awhile now, is using Dough with it. The dough platform links to your thinkorswim account and makes looking at options easy. Not saying you will make money quickly or any but will give you a better visual of call and puts and whats your chance of making money.

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